MiFID II Exocet presentation Q4 2012

FIXNETIXThe ultimate trading advantage


Chief Administration OfficerFixnetix Limited

The MiFID II ExocetHow to avoid it – and maximise ROE

Introduction

Bob Fuller

EU Regulations

• EMIR – passed Mar 2012

• OTC Derivatives – passed Jun 2012

• MAD 2 Directive – scheduled to be passed early 2013

• MAD 2 Regulation – scheduled to be passed early 2013

• MiFID 2 – scheduled to be passed late 2012 or early 2013

• MiFIR – scheduled to be passed late 2012 or early 2013

Latest versions of MiFID 2 and MiFIR passed by MEP’s on the 26th September

Regulatory Timing

• EMIR – ESMA details Sept 2012 - starts Jan 2013?

• OTC Derivatives – ESMA details Sept 2012 - starts Jan 2013?

• MAD 2 Directive – mid 2014

• MAD 2 Regulation – mid 2014

• MiFID 2 – potentially 2014 or maybe delayed to 2015

• MiFIR – potentially 2014 or maybe delayed to 2015

Five Stages of Grief

• Denial – This can’t be happening to me.

• Anger – Why me?

• Bargaining – Attempting to make deals.

• Depression – Feelings of hopelessness.

• Acceptance – Getting on with life.

Where are we in the process?

Final wording not finalised

BUT!!

What do we know?

Various ‘Themes’ are apparent and are very, very unlikely to change, some of these are:

•MiFID 1 is NOT repealed but a lot of the definitions are changed i.e. It’s not just about Equities.•No mixing of the prop book with customer orders unless you are an SI.•More transparency.•The Equity model is to be used as the base model for ALL instrument types.•Moving ALL instrument types to electronic trading (the demise of voice trading).•More connectivity.•More historic proof of what you did and why.•More clearing of other/new instruments.•Both firms and individuals will be subject to fines and/or other sanctions given any ‘ignoring of the rules’.

Plus others

Still under debate

Everything in theory but mostly:

•3rd Country recognition• Potentially a big issue for non EU institutions

•Controls on HFT – will there be any?

•Open access of clearers for non equities

Be Mindful of Changes

• Reduction/removal of margin income on customer flow• Reduction in voice trading• Potential reduction in liquidity for some instruments• More electronic trading – smaller trading rooms?• Increased costs / reduction in revenues

This is very likely to lead to:

• More specialisation within an entity, only concentrate on what you are good at (need to look at that urgently)

• Increased IT spend and increased IT risk.• More outsourcing or use of utilities

Immediate Preparations for you

• Speak with your compliance departments

• Read all the regulations

• Attend conferences and events on regulations

• Discuss with peer group and industry associations

Immediate Preparations for your Company

• Engage with your compliance officer at Board level

• Look at what this is likely to do to your revenue for

each area

• Look at your costs for each area

• Look at how you might reduce costs to make it still

profitable e.g. outsourcing/industry utility

• Decide either to reduce costs or leave that business

stream

Cushioning the Magnitude of Change

Don’t! Think it will all go away i.e. getting stuck in the first four stages of Grief.

Do! Analyse your business NOW!!!!

Remember!The longer you leave it the more it is likely to cost you, just remember Y2K and the Euro. IT consultants rates became ever higher!

The MiFID II Exocet

MiFID II’s sharp teeth

21 November 2012

[email protected]

EMIR - European Markets Infrastructure Regulation

MAD II – Market Abuse Directive and Regulation

CRD IV – Capital Requirements Directive and Regulation

MiFID II – Markets in Financial Instruments Directive and Regulation

Structure of the Packages

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Each of EMIR, MAD II, CRD IV, MiFID II is/has its Regulation

Under EU law:

Directives

•must be transposed into each Member State’s national law by secondary legislation

•ample scope for incorrect/incomplete porting

Regulations

•‘binding in their entirety & directly applicable in all Member States’

Directives and Regulations

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Article 71:

•broad powers for competent authorities (regulators)

•enhances regulators’ powers from earlier drafts by:

•extending information access powers and

•including an express power to ‘require the freezing and/or sequestration of assets’


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Article 72

•requires regulators to be given the supervisory remedies necessary to exercise their functions

•powerful, targeted remedies:

• ‘requiring the suspension of trading in a financial instrument’

• ‘limiting the ability of any person … from entering into a commodity derivative’

5.10.12 draft goes further through proposed new express powers:

• to award compensation or other remedial action:

• ‘to correct any financial loss or other damage suffered by an investor as a result of any conduct or practice [contrary to MiFID II or MiFIR]’

• ‘to require the removal of [an individual] from the management board of an investment firm or market operator’


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Article 75(1)

•requires Member States to:

•‘ensure that their laws, regulations or administrative provisions provide for sanctions at least’ for

•twenty seven listed (from (a) to (za)) breaches of authorisation or recognition requirements or other rule book breaches


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Article 75(2)

tough sanctions, including:

• for a firm or company, fines up to 15% [was 10%] of the ‘total annual turnover in the preceding business year’

(turnover concerned is that ‘resulting from the consolidated account of the ultimate parent undertaking’)

• for an individual, fines up to €10m (was €5m)

• fines up to 10 x ‘the amount of the benefit derived from the violation where that benefit can be determined’

• ‘temporary ban on the investment firm being a member of or participant in regulated markets, MTFs or OTFs’


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MiFID II’s sanction regime characterises the significantly altered risk/reward balance

A big change from the much lighter touch framework that has been in place since competition in equities trading was first opened up five years ago by MiFID


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Kemp Little LLPSolicitors

Cheapside House138 CheapsideLondon EC2V 6BJ

Tel: 020 7600 8080Fax: 020 7600 7878

www.kemplittle.com

Kemp Little LLP is a limited liability partnership. Registered number OC300242 England. Registered office as shown

IBM/EAX Multi-asset Class Execution Shared Service/Utility

MiFID 2 – Exocet or opportunity?

John Mattingley - EAX

[email protected]

Ian Bentinck - IBM

[email protected]

© 2012 IBM Corporation23 IBM and EAX confidential. No part of this may be circulated outside IBM and EAX without permission by IBM and EAX

Disclaimer

All the information, representations, opinions and statements in this document are accurate and correct to the best of our present knowledge. The contents of this document do not constitute a formal estimate or any proposal for commercial agreement. These rough order of magnitude figures are only based upon information provided and our experience of performing similar services for other clients. They are not intended (and should not be taken) to be contractually binding unless and until they become the subject of a separate agreement between the parties. The figures are based on our current level of understanding of the project and will be subject to revision and adjustment as necessary once more precise requirements are understood They are subject to contract and as such nothing in this document should be construed as an offer capable of acceptance.

This document and any supporting documentation contains information which is confidential to IBM and is submitted to you on the basis that it must not be used in any way nor disclosed to any other party, either whole or in part, except to employees or professional advisors of EAX for the purpose of considering its contents.

This document contains information which is confidential to IBM and EAX and is submitted to you on the basis that it must not be used in any way nor disclosed to any other party, either whole or in part except that the information may be disclosed to your employees or professional advisors where such disclosure is on a need to know basis, and is for the purpose of considering its contents. Otherwise disclosures may not take place without the prior written consent of IBM.

IBM is a registered trademark of International Business Machines Corporation. All other trademarks are acknowledged.

Background & Concepts

What is the industry doing about it?

John Mattingley, EAX & Ian Bentinck, IBM Global Business Services


Growth rates in Europe are poor compared to Far East: – Better opportunity in Emerging Markets– Resource needs to be allocated in line with profit

It is becoming less affordable to handle European trading flow in-house for banks and brokers due to:– Democratization of I-bank technologies: Leveling of

perceived technological advantages– Accelerating tech-refresh cycles– Narrow spread/thinner margins on unpredictable

volumes– Increasing development spend due to regulation– Little or no differentiation among I-bank competitors

at the tech/ops level– Excessive vendor platform dependence– Less volume

Pressure to move from fixed to variable cost

Regulation: Basel III, Dodd-Frank, MiFID/R 2– Dodd-Frank & Basel III capital adequacy lower Cash Equities

business ROE from 25% to 7%– MiFID/R 2 will further lower ROE to ≈ 0%– Requirement to build infrastructure for “equities-like”

instruments add further cost– Urgent mitigating actions required to stay in business.

Investment market: Situation

The questions to ask are:

•Is the current market solution (multiple instances of in-house) a sensible one?•It was once, but conditions now suggest otherwise?•Is there a solution?

IBM EAX:

•Is the IBM EAX tech. platform the sensible alternative? Yes•Can it be done practically? Yes•Does it make economic sense? Yes

© 2012 IBM Corporation

Build a definitively-neutral, end to end, order management, order execution, smart order routing and best execution utility performance with performance equal to or better than that of the top Tier 1 banks, and recruit sell-side clients on a bps/transaction basis

Base it on best-in-class, proven technologies, design it to be infinitely scalable and capable of handling other asset classes, and site it alongside major exchanges to deliver lowest available latency Create an order/execution management front-office to the SOR software which moves the industry away from over-dependence on one vendor enables any bank/broker of any size to offer the same enhanced services as the Tier 1sDevelop a data warehouse capable of providing full audit capability and a consolidated tape service, and let the Regulator have access to it

Maintain competitive lead/continue to develop customer relationships and revenues via development of data products and services and by the introduction of other asset classes as specified by the Regulator

What should the industry do about it?


Operation/ManagementOwnership

IBM Confidential

IBM

Builds and operates the shared service, including new product/service development as specified by NewCo

Initial owner of EAX Concept and IPR

3PMC

Strategic development and design of the service,

commercialisation/market development and management of the

utility to steady state

Consortium – 8-10 Sell-side Institutions

100% ownership of NewCoSets policies, objectives and budgets

for NewCo, .

NewCo:

Executes Consortium policies. Develops strategic plans to meet objectives and manages budgets.

Owns the shared service, outsources build and operations to IBM.

Commercialisation/management outsourced to 3PMC until steady state

achieved

Suggested Governance Model


Overall Timeline

28 IBM & EAX ConfidentialApril 2012

Operate

1 Jan 13 31 Mar 13

1 Oct 13 1 Aug 1430 May 1431 May 13 1 Feb 14

Mobilise and Plan

Requirements & Design

Build

Test Phase 2

Test Phase 1

FSA Service Framework


Net profit Non-Profit org

# employees 200 CLS, 200 IBM, 50 Other 3rd Party

Shareholders 70

Member Banks 59

CLS Group was founded in 1997 to create the first global settlement system, eliminating settlement risk in the foreign exchange market. CLS Settlement is the market standard for FX settlement and is the industry’s response to increased and continuing regulatory concern about settlement and systemic risk associated with the growth in FX trading.

CLS Settlement is offered by CLS Bank International (‘CLS Bank’). Owned by the foreign exchange community, CLS Bank operates the largest multi-currency cash settlement system to eliminate settlement risk in the foreign exchange market. Based on information in the settlement service and recent central bank and market surveys, CLS estimates that in terms of the market for which it provides settlement risk elimination services, its market share is 68% as at April 2010. This emphasises how successful the service has become since its launch 2002.

• Seventeen currencies are currently eligible for CLS Settlement. They are: US Dollar, Euro, UK Pound, Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar, Swedish Krona, Danish Krone, Norwegian Krone, the Singapore Dollar, the Hong Kong Dollar, the New Zealand Dollar, the Korean Won, the South African Rand, the Israeli Shekel and the Mexican Peso.

Shared Service for Global Settlement System

Operational Capacity, Resilience & Flexibility

Support for new currencies and FX related products / servicesFlexibility to be able to meet changes in market and regulatory environment rapidly Build capacity to support expect future market growth whilst preserving the resilience of the core system to physically settle during times of market stress

Next Steps• Call John Mattingley, Karen Knight or Ian Bentinck for further information


Editor FT trading RoomFinancial Times

The MiFID II ExocetHow to avoid it – and maximise ROE

Philip Stafford


There is an Exec overview on the potential effect of these new EU Regulations.

Written by Richard Kemp of Kemp Little LLP, the leading City IT law firm.

Copies available tonight or download from our website:

http://www.marketchange-mifid2.com


Please feel free to contact any or all of us:

Jefferson Young, Consultancy & Technology - [email protected]

Jefferson Young, Financial Institutions - [email protected]

Fixnetix - [email protected]

Kemp Little - [email protected]

Exchange Axis - [email protected]

IBM - [email protected]

MiFID II Exocet presentation Q4 2012

Business

Transcript of MiFID II Exocet presentation Q4 2012